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Corporate taxation in Asia Pacific

Wilbert Kannekens:

Most of the changes are driven by the fact that all these jurisdictions are in need for money. The deficits are huge, even in this region. There’s some exceptions but most of the countries need a lot of money. So what is currently happening in the corporate tax field is that there’s a lot of anti-abuse measures being implemented, that’s one, both in treaties and domestically. One of the other things that I see happening is an enormous focus on permanent establishment, which means that countries try to tax the income by stating that there is a branch, a taxable activity in a country and that profits need to be attributed to this branch. That’s a quite scary development because all these countries have their own perception of what constitutes a permanent establishment and what not.

I think the third development is around transfer pricing. Most of the countries try to capture more income through applying new transfer pricing rules or allocating income, for example, to intangible assets. That’s one of I think the most important changes that I see happening over the last couple of years and I don’t think this has come to an end. This is going much further, ultimately that leads to a lot of uncertainty in this region and I think our challenge for the future in this region is to take that uncertainty away. There’s two ways how you can do that, either by agreeing in advance with the tax authorities what the status of certain transactions is, through an APA – Advanced Pricing Agreement – or for example by having tax authorities issuing circulars or explanation letters how to deal with certain situations.

Well the variety in this region is enormous. I mean, there are countries that have been economically active for a long period of time. Look at Japan, for example, and Australia, there’s newer economies like China that’s pretty mature as well and there are fast growing new countries like Indonesia and all of them are trying to pull investment in. There is not a specific trend that I see in this region. There’s a lot of tax holidays being applied trying to attract income. One of the things that we’ve also seen is that corporate tax rates have been going down in this region. That’s a global trend but even in this region it’s been going down.

If you compare it to the rest of the world, I think Asia is now around 22 percent on average, Europe 20 percent and North America 30 percent. So that’s also clearly a trend. But in the current circumstances where governments are looking for money, I don’t see an explosion of measures to attract income into these countries.

I think there’s a lot of commonality what’s happening in Europe, what’s happening in the United States or in the Americas and in this region. Like I said earlier, there’s a lot of anti-abuse measures being implemented, treaties are being changed, limitation on benefit closes are reintroduced into the treaties with countries in Asia Pacific as well. So there’s a lot of similarities. There is some more attention in this region for investments, subsidies, for grants and for tax holidays.

There is a couple of developments in this region that countries are working closer together. That’s been happening in Europe for quite some time, within the European Union, but the Trans-Pacific partnership has been in place for approximately ten years now in this region. It’s only a few countries but likely a number of countries will be added to this agreement and it tries to establish a free trade zone.

There is the Asian economic community that has been in place for decades but over the last couple of years I think they’re moving fast forward. It’s currently aiming to be an internal market without borders so that goods can be transferred within this community and without any borders and boundaries. But it’s not completely comparable with what we have in the European Union that goes much further, that’s also political and a monetary union. But if these countries get our act together and they move fast, it could be a very important and powerful block compared to the rest of the world.

Wilbert Kannekens, KPMG’s Head of Global international Corporate Tax, addresses some of the most important changes in the Asia Pacific region affecting corporate taxation including anti-abuse laws, permanent establishments and transfer pricing.